Property lawyer Alicia Renshaw from Leonard Curtis Legal looks at the options
If you are a commercial tenant with large offices and a 10 year lease, but with a new hybrid flexible working model being demanded by employees, the chances are you are reviewing your space needs, but how do you manage changes to a long-term leasing agreement smoothly?
It certainly requires a willing partner in the commercial landlord space and according to a report by Savills (Oct 2020) there is growing appetite for flexible workspace strategies and even management agreements where landlords receive rent based on the revenue or profit of the tenant. This is good news.
So in changing times for both landlord and tenant here are four common options to consider; subletting, lease surrender, break clauses and assignment.
Subletting
Depending on the terms of the lease, subletting may be permitted either in whole or in part.
This is a potential solution for tenants who want to cut down on office space, rather than getting rid of it completely. Conditions for subletting will be included in the terms of the lease so ensure these are reviewed before making a decision. Leases will commonly permit the tenant to sublet the whole of the premises with landlord’s consent, however, it is less common for leases to allow subletting of part.
Lease surrender
You could also look at a lease surrender which determines the term of the lease and concludes both the landlord and tenant obligations under a lease. This requires the consensual agreement of both to progress. Sometimes this suits both parties because not only does it allow the tenant to terminate its lease the landlord can remodel the premises to either create additional office space or a flexible workspace . The landlord can impose certain conditions on surrenders, including asking for payment of a ‘surrender premium’ as compensation for the tenant terminating the lease early.
Break clauses
Some fixed term commercial lease can include an option for the tenant to terminate the lease early, either on a specified date or at any time during the term on a rolling basis. This break clause is best pursued if a tenant wants to give up all of the floor space granted by the lease rather than simply opting for a smaller space. Break clauses may contain conditions that must be strictly observed. A tenant is usually required to serve notice on the landlord, often six months in advance, and all monies due under the lease are required to be paid up to date. If occupiers don’t meet the break conditions specified, they may lose the opportunity to terminate the lease so we do recommend that tenants take expert advice well ahead of the break date detailed in their lease.
Assignment
Finally, you can look at assignment, where a tenant can transfer its lease to a new party. The right to assign is usually only applicable to the whole of the leased premises and most commercial lease agreements will need the landlord’s consent to do so. Most commercial leases contain conditions which can be imposed by the landlord on assignment, which may include what’s called an authorised guarantee agreement, where the outgoing tenant guarantees the incoming tenant’s obligations under the lease. These conditions enable the landlord to retain control over the identity of the tenant and to ensure the new tenant is able to meet its obligations under the lease.
State protection for tenants with Covid arrears pending
In a separate development for the sector the government looks likely to legislate to ring fence Covid arrears when the restrictions around landlord enforcement are eventually due to be lifted in March next year. This will potentially include a new system of binding arbitration for landlords and tenants who cannot come to a negotiated settlement.
The policy has suggested:
- Arrears that have accrued since March 2020 for those businesses affected by closure until the time when restrictions were lifted for their specific industry, for example hospitality, will be ringfenced.
- A moratorium on the eviction of tenants for non-payment of rent will continue until 25th March 2022, unless new legislation is passed.
- Tenants not affected by closures or pandemic will be required to continue to pay their rent. Also, tenants who have been affected, but for whom restrictions have now been lifted, will be expected to pay rent from that point.
- The legislation to be passed will only apply to ringfenced arrears. This means a landlord will only be able to evict a tenant affected by closure for the rent arrears accrued before March 2020 and after the restrictions ended.
- The landlord is to share some of the tenant’s financial burden where they are able to do so. The Government expect terms to be agreed between the landlord and tenants impacted by closures to defer or waive an appropriate proportion of those rent arrears and in the absence of agreement, both will need to undertake binding arbitration.
Get in touch with Leonard Curtis Legal on hello@leonardcurtislegal.co.uk or 0161 696 3520.